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The Lighthouse is the weekly email newsletter of the Independent Institute.
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Volume 11, Issue 48: November 30, 2009

  1. Bernanke’s Preemptive Attack
  2. Loss-Aversion Bias May Help Explain Afghanistan Policy
  3. Will Hubris Thwart Brazil’s Progress?
  4. Government No-Fly Lists Are a Holiday Turkey
  5. This Week in The Beacon

1) Bernanke’s Preemptive Attack

Federal Reserve Chairman Ben Bernanke will this week face confirmation hearings to determine whether he will serve a second term. Meanwhile, Bernanke argues in a Washington Post op-ed that various Congressional attempts to audit the Fed and curb its power would undermine the central bank’s “independence” and thus hamper economic recovery.

“We may interpret this article as a preemptive attack on his congressional critics,” writes Independent Institute Senior Fellow Robert Higgs in a new post at The Beacon. Some of these critics “will no doubt take the opportunity afforded by. . . Thursday’s hearing to attack his management of the Fed and, indeed, the Fed itself. ”

Bernanke’s warning about economic disaster in the wake of a reined-in Fed “seizes the high ground,” continues Higgs, “by creating the presumption that Bernanke and the present Fed have proved themselves to be beneficial to the causes of financial reform and economic recovery.” As for the supposed financial and economic stability that the chairman credits the Fed for fostering, Higgs asks rhetorically:

“Is Bernanke thinking about the stability we enjoyed between the world wars, when the Fed managed to bring about the onset on what proved to be the greatest depression in world history (an accomplishment for which he has previously accepted responsibility on behalf of the Fed)? Or perhaps he is thinking instead about the stability we enjoyed since 2001, when the Fed pushed the Fed funds rate quickly from 6.5 percent to 1 percent, held it at a negative real rate for several years, then pushed it up quickly to 5.25 percent in 2006-2007, then shoved it down quickly to almost zero in the past year? . . . Or perhaps he is thinking about the fact that. . . the dollar has lost more than 95 percent of its purchasing power [since the Fed’s creation]. Who calls this degree of debasement stability? ”

“A Reader’s Guide to Bernanke’s Preemptive Attack,” by Robert Higgs (The Beacon, 11/28/09)

Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity, by Robert Higgs.

Money and the Nation State: The Financial Revolution, Government and the World Monetary System, edited by Kevin Dowd and Richard H. Timberlake, Jr.

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2) Loss-Aversion Bias May Help Explain Afghanistan Policy

In 1965, Lyndon Johnson’s Undersecretary of State warned that if his administration escalated U.S. military involvement in Vietnam to avoid losing the war, it would not be able to reverse course. The problem, in essence, was the same issue as loss-aversion bias in the realm of investor psychology, and the leading example of this phenomenon in foreign policy today may be U.S. troop levels in Afghanistan, according to Independent Institute Research Fellow J. Victor Marshall.

“Think of Afghanistan Inc. as a distressed company in which the U.S. pension fund has already invested billions of dollars,” Marshall writes. “Should the fund invest billions more to try to rescue the enterprise, or call it quits?”

Those who favor sending more U.S. troops believe Afghanistan is “too big to fail,” whereas those who oppose doing so believe it is time to cut our losses and leave the betting table. “To keep us from getting further lost in [Afghanistan’s] desert sands and rugged mountains, [President Obama] must consciously resist our collective aversion to admitting and accepting losses,” Marshall concludes.

“Go with the Savvy Investors,” by J. Victor Marshall (San Francisco Chronicle, 11/20/09) Spanish Translation

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3) Will Hubris Thwart Brazil’s Progress?

Brazil has weathered the economic recession remarkably well, and if its rapid growth continues it will surpass Britain’s GDP within a decade. However, although Brazil’s economy is quickly rising to first-class status, its politics is still mired in statist overreach and periodic scandal, according to Independent Institute Senior Fellow Alvaro Vargas Llosa.

The problem is that the country’s leaders seem to conflate economic development with the kind of national status that comes from a nation flexing its muscles on the world stage, argues Vargas Llosa. And although the former (wealth creation) can eliminate poverty, the latter (wealth diversion) mainly distracts leaders from solving the problems faced by ordinary Brazilians.

Brazil’s leaders—including candidates in next year’s presidential elections—should tread cautiously lest their collective hubris reverse Brazil’s impressive economic gains. “Its ambition ought to be focused on reforming its political system so that prosperity can be something more than a combination of high revenue from commodities and some manufactured products, and social programs such as Bolsa Familia, a subsidy distributed to some 11 million poor families,” writes Vargas Llosa. “The leaders need to tame their ‘hubris’ before it pulls too far ahead of socioeconomic reality.”

“Brazilian Hubris,” by Alvaro Vargas Llosa (11/25/09) Spanish Translation

Liberty for Latin America: How to Undo Five Hundred Years of State Oppression, by Alvaro Vargas Llosa

The Che Guevara Myth and the Future of Liberty, by Alvaro Vargas Llosa

Lessons from the Poor: The Triumph of the Entrepreneurial Spirit, edited by Alvaro Vargas Llosa

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4) Government No-Fly Lists Are a Holiday Turkey

About 1,600 people are added each day to the FBI’s terrorism watch list or no-fly list. The lists, however, are unconstitutional and ineffective, according to Ivan Eland, director of the Independent Institute’s Center on Peace & Prosperity. They are unconstitutional because the government lacks probable cause to arrest those it adds to the lists.

They are ineffective, Eland argues, because terrorists are now working around them—by recruiting women and Europeans who have managed to avoid getting their names listed. According to the 9/11 Commission, the “special registration” customs and border program, which requires males from 25 Islamic countries to undergo inspections at the airport that may detain them for hours, has failed to stop or deter terrorists from entering the country.

Concludes Eland: “When the government wastes its time on such violations of civil liberties, true security suffers.”

“Government Terrorism Lists Are a Holiday Turkey,” by Ivan Eland (11/25/09)

Partitioning for Peace: An Exit Strategy for Iraq, by Ivan Eland

Recarving Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty, by Ivan Eland

The Empire Has No Clothes: U.S. Foreign Policy Exposed, by Ivan Eland

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5) This Week in The Beacon

Visit the Independent Institute’s Spanish-language blog, El Independent. Below are the past week’s offerings from our English-language blog, The Beacon.

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